J.P. Morgan's fund business on growth path

JessicaPapini

NEW YORK (MarketWatch) -- J.P. Morgan Chase & Co's
JPM, -0.61%
five-year effort to stitch together a coherent mutual fund management business finally came together last year.

To be sure, J.P. Morgan is still an also-ran in terms of size. But it attracted more than $26 billion in new money into its mutual funds last year, excluding money market funds, where flows can be volatile--a surprisingly strong showing that ranked the bank third in flows behind giants Vanguard Group Inc. and Pacific Investment Management Co.

Many banks have divested their mutual fund arms. But George Gatch, the chief executive of J.P. Morgan's fund management business, says doing well managing money is "incredibly important" for the bank, if only to support its lucrative private banking business for wealthy clients.

"Five years ago my goal was to be among the top five in net fund flows," said Gatch, who has been with J.P. Morgan for more than 20 years. "No one believed me, internally and externally."

In 2004, $1.6 billion flew out of J.P. Morgan funds. To change course, J.P. Morgan ramped up distribution by selling financial advisors on its products in small group meetings. It helped that the bank's research is a hit. It also helped that the performance of J.P. Morgan's funds improved.

Gatch began a hiring spree in July that will have increased the fund group's sales staff by 30% once he wraps it up in April. And he isn't finished investing in the business. J.P. Morgan Funds will double its spending on advertising this year.

"J.P. Morgan has really made a commitment to the business," said Burt Greenwald, president of B.J. Greenwald Associates, an industry consultant. "It's quite unusual for a bank to be as successful as J.P. Morgan has been in the mutual fund business."

Most of J.P. Morgan's competitors aren't large retail banks, but fund management companies. Vanguard Group is the industry heavyweight, with more than $1 trillion in assets under management and $94 billion in net inflows last year, both excluding money market funds, according to data from Strategic Insight. J.P. Morgan is No. 14 by assets, which rose 71% last year to $91 billion.

Gatch said inflows are running ahead of last year's pace. His goal is to stay in the top five funds in terms of net inflows.

J.P. Morgan got some help from industry trends, as fund flows were "heavily skewed" toward fixed-income funds, where J.P. Morgan is strong, said Don Phillips, managing director at Morningstar. Plus, volumes were up overall after suffering during the crisis.

"Industry flows as a whole were much better in 2009," Phillips said.

But J.P. Morgan also has taken to the road to get the message out about its funds, specifically targeting independent financial advisors. And it has attracted professionals like David Kelly, who joined in 2007 from Putnam Investments, where he was chief economic advisor, to become J.P. Morgan Funds' chief market strategist.

Mark Casady, CEO of LPL Financial, decided to give J.P. Morgan more business recently. Casady said he believed years ago that the firm was "one of the most likely to succeed as a major player in fund management" because of its portfolio management skills and the way it supports financial advisors.

J.P. Morgan still has work to do. Gatch concedes that the market for retirement products has grown faster than his bank's fund management business. The bank doesn't break out the earnings of the fund management group, but net income for J.P. Morgan Chase's asset management business overall rose 5% in 2009 to $1.4 billion.

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